In a recent article for CEE Legal Matters, Schoenherr Attorney at Law Alexandra Bognar wrote that Hungary adopted a UBO Register Act this year. We spoke to Bognar to learn more about the new piece of legislation.
CEELM: Let's start with a bit of context – what's the UBO register and what is different as of May 2021?
Bognar: UBO stands for “ultimate beneficial owner,” who is the person that ultimately benefits from a company’s financials. The EU sets a threshold for being an ultimate beneficial owner as “controlling” at least 25% of the voting rights in a company. If there is nobody who exists that fulfills this criterion, the managing director shall be considered the ultimate beneficial owner.
The concept of a UBO is important not only because of the existence of people’s curiosity as to who stands behind companies but also for other practical reasons. For example, when it comes to investigating economic crimes, what I’ve had an opportunity to see in practice is that intricate corporate structures can often shadow who’s behind what, and this makes things more complicated to be discovered.
Although Hungary has already adopted most of EU rules and regulations – and the notion of an ultimate beneficial owner has been in use for years now – the UBO register we expected to be established simply was not happening. Our clients have been asking for two or three years now when will it happen; Hungary was among the final EU member states to establish it. This May saw exactly that.
CEELM: Walk our readers through the update – what are the critical action points?
Bognar: The first thing of note is that the UBO register will be run and managed by the tax authority of Hungary, while the data delivery itself will be performed, primarily, by commercial banks. The reasoning behind this is that every newly established company must set up a bank account – so banks are positioned quite well to be on the beat of things. Also, banks perform a rather thorough Know Your Customer (KYC) check with each and every customer, so they should know a lot about these companies.
Banks have an obligation to report any and all changes of the ultimate beneficial owner of a company on a monthly basis.
CEELM: What happens otherwise – what are the risks and liabilities?
Bognar: Well, the biggest consequence for businesses failing to comply and report their ultimate beneficial owners honestly and timely will come into play next February.
Next February will see a wide plethora of state bodies such as courts and prosecutors, but also lawyers and the like, gain access to the UBO register. There will be little to no wiggle room for obfuscation of corporate ownership and transparency when it comes to corporate structures unless one wishes to face sanctions. And, on top of that, it will be far, far easier for us, as lawyers, to perform our own KYC while onboarding a new client – with access to the UBO register, it will be easy to compare the data the client gives us and that which is contained in the register. Should there be a discrepancy, we– as well as state bodies or other service providers – can report them to the tax authority rather easily which contributes to the transparency.
CEELM: Does this update affect everyone to the same extent – what are the main differentiators if not?
Bognar: Well, yes and no.
Yes, in the sense that the same rules are applicable to all entities – e.g. the same data must be given to the banks irrespective of the entity concerned, same deadlines apply, etc.
No, in the sense that the EU AML directive concerns all entities meaning that all UBOs are to be registered irrespective of the type or form of the given entity. The Hungarian UBO act, on the other hand, applies to almost all entities but the legislation does not cover e.g. political parties or public foundations.
CEELM: What's still left up in the air – what are the main questions you currently receive from clients on this?
Bognar: Clients are generally interested in knowing what is their to-do with the newly established UBO and what sanctions come into play in case they do not comply.
As mentioned before, prosecutors, judges, lawyers, auditors, and the like will have direct access to the register and will have a chance to report discrepancies. If such a report is made, it will affect the given entity's TT index.
CEELM: What exactly is the TT index?
Bognar: The TT index is the trustworthiness or reliability index. Upon being registered, all entities start with ten points and ideally, all entities shall maintain ten points. However, in case a discrepancy is reported, the tax authority amends the entity's TT index and decreases by one or two points depending on who reported the discrepancy. If the report is submitted by an authority, prosecutor or court, the TT index is reduced by two points while in the case of other service providers, the entity's TT index is reduced by one point.
The tax authority will notify the entity on this and request it to amend the data – practically requesting the entity to visit the bank and update the data on the UBO, so this is the only time when the client is directly 'asked' to do something. If the data is corrected, the entity regains its ten points for the TT index.
CEELM: Why does the TT index matter?
Bognar: If the TT index falls under eight points, the entity is considered to be “uncertain.” If the TT index falls under six points, the entity is considered to be “unreliable.” These will eventually be published on the tax authority's website. In addition, service providers must reject any business exceeding HUF 4.5 million with an entity having an unreliable label. This could be quite a severe sanction for businesses.
CEELM: What’s your opinion on the immediate future for the UBO? What do you think its application will bring?
Bognar: What we see now is that it is pretty easy to end up being “uncertain” or even “unreliable” because it only requires 1 or 2 reports by certain bodies. Realistically speaking, even if the entity reports a change immediately to a bank, the bank only sends updates on a monthly basis.
It is not hard to imagine that a different service provider notices a discrepancy, and therefore reports it, even before such a monthly report is even sent to the tax authority by the bank. This could be even more severe if an entity is, for example, sold twice within a month. For this precise reason, I remain a bit cautious and would very much like to see how these rules will be applied in practice, but I’m afraid we are going to have to wait at least a year for this.